Investment Loans and Tax Deductions for Contractors

Self-employed contractors in Sydney face different income verification requirements when applying for investment loans, but once approved, the same tax deduction rules apply as for any other residential property investor.

The interest you pay on an investment property loan is tax deductible to the extent the property is rented or genuinely available for rent. Other ongoing expenses such as council rates, insurance, property management fees, repairs and depreciation can also be claimed. The distinction between what you can and cannot claim comes down to the purpose of the borrowing and how the property is used.

Interest Deductibility and Loan Purpose

Interest is deductible when the borrowing is used to acquire or hold a property that produces assessable rental income. The key is that the funds must be used for the investment property, not diverted to private purposes. If you refinance an investment loan and draw out additional equity to buy a car or renovate your own home, only the portion of interest attributable to the investment property remains deductible.

Consider a contractor who purchases a two-bedroom unit in Parramatta as a rental. The property is tenanted year-round at market rent. The entire interest cost on the loan used to purchase that property is deductible against the contractor's assessable income, including income from contracting work. If the same contractor later refinances and takes out an extra $50,000 for a personal vehicle, the interest on that $50,000 portion is not deductible, even though the loan is secured against the investment property.

This is why we recommend keeping investment and private borrowing completely separate from the outset. The documentation and apportionment required to split interest deductions later adds complexity at tax time and increases the risk of errors.

Negative Gearing Under Current and New Rules

Negative gearing occurs when your deductible expenses, primarily interest, exceed the rental income you receive. The loss can be offset against other income such as your contracting income, reducing your overall tax liability.

For properties you held at 12 May 2026, or properties under contract at that time, negative gearing continues to operate as it always has. Losses remain fully deductible against all income, including salary, wages and contractor earnings, until you sell the property. New builds acquired after that date are also exempt and retain full negative gearing treatment.

From the 2027-28 income year, losses on established investment properties acquired after 12 May 2026 can only be offset against income from other residential properties, including capital gains on residential property sales. Excess losses carry forward to future years and can be used when you have residential property income or gains to offset.

In our experience, contractors often ask whether the changes to negative gearing make investment property less attractive. The answer depends on your timeline and property selection. If you are acquiring an established property now and plan to hold it for ten or fifteen years, the inability to offset early-year losses against contracting income will increase your after-tax holding cost in the short term. But the property may still deliver strong long-term returns through capital growth and rental income, particularly if you select well and hold through multiple cycles.

Claimable Expenses Beyond Interest

Interest is the largest deduction for most investors, but it is not the only one. You can claim council and water rates, strata levies if the property is in a complex, landlord insurance, property management fees, repairs and maintenance, and depreciation on both the building and fixtures.

Repairs are immediately deductible if they restore the property to its previous condition without improving it. Replacing a broken window or fixing a leaking tap are repairs. Installing a new kitchen or adding a second bathroom are capital improvements, which cannot be claimed immediately but may form part of the cost base for capital gains tax purposes when you sell.

Depreciation is a non-cash deduction that can be particularly valuable in the early years of ownership. A quantity surveyor prepares a depreciation schedule that itemises the decline in value of the building structure and the plant and equipment within it, such as ovens, air conditioners, blinds and carpets. The deduction is claimed annually over the effective life of each item.

For contractors with variable income, these deductions provide a degree of certainty. Your rental income and claimable expenses remain relatively stable year to year, even when your contracting work fluctuates.

Structuring Loans to Preserve Deductibility

The structure you choose at the time of borrowing can have lasting consequences for what you can claim. Interest-only loans are common among investors because they maximise the deductible interest and keep the loan balance higher for longer, which can be useful if you plan to use equity for further investment.

Principal and interest loans reduce the debt over time, which lowers your interest cost and your deduction each year. Some contractors prefer this approach if they want to reduce overall debt or if they are closer to retirement and want a paid-off asset.

Offset accounts are useful for holding surplus cash without reducing the loan balance or the deductible interest. If you park your contracting income in an offset account linked to an investment loan, you reduce the actual interest you pay, but the full loan balance remains in place for deduction purposes. In contrast, if you make lump sum payments directly onto the loan, you reduce both the balance and the deductible interest.

When setting up an investment loan, we structure the facility so that every dollar borrowed is used for the investment property and nothing else. If you need to access funds later for private purposes, we set up a separate split or facility rather than contaminating the investment loan.

Capital Gains Tax and Indexation from July 2027

When you sell an investment property, any profit is subject to capital gains tax. Under the current rule, if you have held the property for more than twelve months, you receive a 50 per cent discount on the taxable gain. From 1 July 2027, the discount is replaced by cost base indexation and a 30 per cent minimum tax rate on real gains accruing from that date.

For properties you already own, gains will be apportioned. The portion of gain that accrued before 1 July 2027 is taxed under the current discount rules. The portion accruing after that date is indexed for inflation, and you pay tax on the real gain only, subject to a minimum rate of 30 per cent on that portion.

If you buy a qualifying new build, you can choose between the old discount method and the new indexed method when you sell, giving you flexibility to pick whichever results in a lower tax outcome.

The cost base is the original purchase price plus acquisition costs such as stamp duty, legal fees and any capital improvements you made during ownership. Indexation adjusts that cost base upward in line with inflation, which reduces your taxable gain.

Documentation and Record Keeping for Contractors

Self-employed contractors are already accustomed to detailed record keeping for their business income. The same discipline applies to investment property deductions. Keep records of all loan statements, rental income, agent statements, invoices for repairs, insurance policies, rates notices and depreciation schedules.

If you use a portion of your home for administrative tasks related to the investment property, you may be able to claim a small portion of home office expenses, but the rules are narrow and the deduction is usually modest. Most investors do not claim this unless they manage multiple properties and spend significant time on administration.

The ATO reviews rental property deductions closely, and contractors can be a focus area because of the variable income and the temptation to over-claim. Stick to what is genuinely incurred for the purpose of earning rental income, keep every receipt, and work with an accountant who understands both contracting and property investment.

Borrowing Capacity and Serviceability for Contractors

Lenders assess your ability to service an investment loan by looking at your verified income, existing debts, and the rental income the property will generate. For contractors, income verification often requires two years of tax returns, a letter from your accountant, and recent bank statements showing consistent deposits.

Rental income is included in the serviceability calculation, but lenders typically only recognise 70 to 80 per cent of the rental amount to account for vacancy, maintenance and periods without a tenant. If the property will rent for $600 per week, the lender may include $480 per week in your income for serviceability purposes.

Lenders also apply a serviceability buffer, currently set at 3.0 percentage points above the loan interest rate, to ensure you can still afford the repayments if rates rise. This buffer has been in place since October 2021.

From February 2026, banks must also comply with a debt-to-income lending limit, which caps the proportion of new loans that can be made to borrowers with total debt of six times their gross income or more. The limit applies separately to investment and owner-occupier lending. For most contractors with stable income and moderate existing debt, this limit does not create an obstacle, but it can affect borrowing capacity if you already carry significant personal or business debt.

We work through these calculations with you before you start looking at properties, so you know exactly what you can borrow and what deposit you will need. This allows you to focus your search on properties within your verified capacity.

Call one of our team or book an appointment at a time that works for you to discuss how your contracting income and investment plans fit together, and to structure your investment loan in a way that supports both your immediate tax position and your longer-term wealth objectives.

Frequently Asked Questions